A Project Report on:

To study the financial elements in the execution of a Lump Sum Turnkey Project

InEngineers India Limited

Submitted in partial fulfilment of PGDBM program2006-09

Submitted by:RAJENDER GUGLANI

Roll Number: 0621002534

Guide: Mrs. Shallivi Wadhwa

Vice President, Genpact, Gurgaon

INSTITUTE OF MANAGEMENT TECHNOLOGY, GHAZIABAD

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PREFACE

This project report describes the work done during summer training in Engineers

India Limited. It also describes the field of operations of EIL in general and the

functions of Finance and Accounts Department in particular.

Training was undertaken in the Finance & Account Department of the above

organization. During the training period, a task was undertaken to study the working of

the division and to analyze the financial position and performance of the company.

The ‘Balance Sheet & Cash Flow Statements/ Cash Forecast Statements’ has been

used for financial analysis to reflect company’s position.

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ACKNOWLEDGEMENT

“To acknowledge is to know gratitude and to gratitude is valuable duty which

ought to be paid to valuable in ones life time”.

---Roolsseau

First and foremost, I sincerely thank to Mr. K.N.Mehra, D.G.M (F&A) and S.K.

Tikku A.G.M (F&A), EIL for giving me an opportunity to undertake this project.

And I would also like to thanks Mr. Jindal (LSTK Projects), Mr. Kapil Gupta

(Budgeting Section- F&A), Ms. Suman (Cash & Bank Section) Mr. A.K. Bansal

(Local Purchases- Loading Factor, Finance), and Mr. V.K. Agarwal (Sr. Manager-

Marketing Finance, F&A) from EIL, for their valuable cooperation and assistance.

I would also like to thank my faculty guide, Dr. S.S. Vernekar (Director, BVIMR)

and my class coordinator (MBA- III Trimester) Mr. Ashish Chandra for their

time to time guidance.

So now when my training has been completed, my heart is full of gratification, so I

cannot forget to thanks the Almighty God and My Parents. Their blessings help me

every where in my life. Thanks God.

RAJENDER GUGLANI

PGDBM( Finance)- 2006-2009

Institute of Management Technology, Ghaziabad.

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INDEX1. EXECUTIVE SUMMARY 52. INTRODUCTION TO:

2.1 ENGINEERS INDIA LIMITED (E.I.L.) 7

BRIEF PROFILE 10 THE COMPANY 11 VISION 14 MISSION STATEMENT 14 RISK MANAGEMENT POLICY 15 AIMS & OBJECTIVES OF THE COMPANY 15 RESEARCH & DEVELOPMENT 16 COMPANY’S HISTORY 17 AWARDS & ACHIEVEMENTS 19 COMPANY STRUCTURE 21 MAJOR COMPETITORS OF E.I.L. 22 SWOT ANALYSIS

25 2.2 FINANCE & ACCOUNTS DEPARTMENT (F&A DEPARTMENT) 28 FUNCTIONS OF FINANCE 30 FUNCTIONS OF ACCOUNTS 31 FINANCIAL TERMS OF PROJECTS (LSTK) 32 ORGANISATIONAL STRUCTURE OF F&A DIVISION- BRIEF 35 VARIOUS DIVISIONS/ ACTIVITIES LINKED WITH F&A (BRIEF DESCRIPTION) 36

3. OBJECTIVES OF STUDY 42

4. PROJECT: 1 A STUDY OF FINANCIAL ELEMENTS IN THE EXECUTION OF LUMP-SUM TURNKEY PROJECTS 43

4.1 OBJECTIVE OF THE STUDY & INTRTODUCTION 444.2 WORKING OF LSTK PROJECTS 454.3 PURCHASE PROCEDURE FOR INDIGINEOUS ITEMS 494.4 BIDDING PROCEDURE 504.5 COMMERCIAL TERMS & CONDITIONS AND EVALUATION 604.6 PAYMENT TERMS 624.7 RISK MANAGEMENT IN LSTK PROJECTS 674.8 CASE STUDY 724.9 LOADING FACTOR 804.10 RECOMMENDATIONS FOR LSTK PROJECTS 87

5. ANNEXURES139

6. BIBLIOGRAPHY 149

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Executive summary

The project is also to study the basic procedure followed by the company to handle a

lump sum turnkey project.

The initial work of the LSTK department starts with estimating the overall cost of the

project. For this, a budget for all the expected expenditure related to that project. Costing

of every project depends upon the work involved & varies accordingly. Estimating the

total cost of the project is the most important work for the company as on the basis of

this, the company charges a lump sum fees from its client. It also gives them a guideline

to make future cash flows in accordance to their expected amount. The cost of various

items can be ascertained by the following ways: -

a.) PRE BID TIE UP. This is done before the submission of quotation to supplier to calculate the right ‘L1” and the tie up depend upon the delivery period.

b.) IN HOUSE COST ESTIMATE : It is done internally depends upon the past relation or experience with the supplier.

There are various factors like change in market situation, monopoly of a vendor &

inflation/deflation which results in the change of the cost of the project in comparison

with the budget prepared. For example, estimated price of an item was Rs.100 but due to

short supply & increase in demand the company had to purchase it in Rs.120, in that case

the company has two options. Either, to use the float available from any other item or use

the contingencies for which the approval of top management is required.

Since costing is done for a future project, so the clauses of inflation/ deflation are also

considered carefully. The cost of the project includes all the covers taken by the company

against any contingent liability or risk.

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There are mainly three kinds of risk involve in these kinds of projects:

1. Completion of project on time2. Price / currency fluctuations3. Other risks

The arrangements to over come these problems must be considered before starting the

project by adding it in the cost of the project.

After the cost of the project is estimated, company starts working over it. The engineering

department prepares a MTO & generates the Marketing Request (MR) to Cost &

Purchase (C&P) Department. On the basis of this, Request for Quotation (RFQ) is send to

the listed vendors of the company inviting them to send their price bid for those material

and equipments.

RFQ also includes the term & conditions of the company regarding various issues

involved in the contract. For ex. Payment terms, delivery period, taxes etc.

The company charges some loading to the vendors as a penalty for any deviations in their

terms. The purpose of loading is done to evaluate all the vendors on same grounds. The

Lowest One (L1) vendor is finally get selected whose price is lowest with technical

acceptance. Once the vendor is selected the information thereof has to be sent to him in

the Form of Acceptance (FOA).

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Engineers India Bhawan, BCP, New Delhi

(Delivering excellence through people)

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BRIEF PROFILE

“Engineers India Limited” provides engineering and related technical services for petroleum refineries and other industrial projects. Its fields of activities include petroleum refineries, pipeline, oil and gas processing, petrochemicals, offshore structures and platforms, ports and terminals, metallurgy, fertilizers, power, highways and bridges, airports, non-conventional/renewable energy sources, and intelligent buildings and urban development. The company offers various services to conceptualize, design, engineer, and construct projects to meet the specific requirements of its clients. It has strategic alliances with Petronet LNG; China National Machinery & Equipment Import & Export Corporation; Harbin Power Engineering Co. Limited; Apache Energy Limited; VAI Industries UK Limited; Deutsche Montan Technologies GmbH; Calibre Projects Pty Limited; Thiess Pty Limited; Curtin University of Technology; IOCL; Petron Scientech, Inc.; Stroytransgaz; and GAIL India Limited. Engineers India Limited was founded in 1965 and is headquartered in New Delhi, India with additional offices in London, the United Kingdom; Abu Dhabi, the United Arab Emirates; and Kuwait, Qatar, Malaysia, and Australia.

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THE COMPANY

Forty Three years ago the country’s planners gave shape to a vision as a result of which

was born EIL an organization to help set up the vital petroleum industry in the country.

Engineers India Limited was established in 1965 to provide engineering and related

technical services for petroleum refineries and other industrial projects.

In addition to petroleum refineries, with which EIL started initially, it has diversified into

and excelled in other fields such as pipelines, petrochemicals, oil and gas processing,

offshore structures and platforms, fertilizers, metallurgy and power. EIL now provides a

complete range of project services in these fields and has emerged as Asia’s leading

design and engineering Company.

Engineers India Limited is diversifying into several new areas including Highways &

Bridges, IT, Airports, Mass Rapid Transport Systems, Ports & Terminals, Power

Projects, Non-conventional / Renewable Energy Sources, Specialist Materials and

Maintenance Services, Intelligent Buildings, Water and Urban Development projects.

EIL’s fields of activities include:

Petroleum Refineries

Pipeline

Oil and Gas Processing

Petrochemicals

Offshore Structures & Platforms

Ports & Terminals

Metallurgy

Fertilizers

Power

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Highways & Bridges

Airports

Non Conventional / Renewable Energy Sources

Intelligent Buildings & Urban Development

Services offered by EIL includes :

Feasibility Studies

Project Management

Planning and Scheduling

Cost Engineering

Process Design

Detailed Engineering

Procurement

Construction Management

Commissioning and Plant Start-up Assistance

Heat and Mass Transfer Equipment Design

Environmental Engineering

Information Technology Services

Engineering Computerization Support Services

Specialist Material and Maintenance Services

Energy Conservation

Plant Operations & Safety including Risk Analysis

Advanced Control and Optimization

EIL provides the complete range of services needed to conceptualize, design, engineer

and construct projects to meet the specific requirements of its clients. Its association with

the clients extends beyond the commissioning of their plants through monitoring

operation of each plant and accumulating feedback on performance. A Lump sum

Turnkey project from concept to commissioning is an area into which EIL has entered in

a big way. EIL’s quality management systems in respect of its services have been

assessed and upgraded to ISO 9001:2000 version.

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Besides its Head Office at New Delhi, EIL has branch office at Mumbai, zonal office at

Kolkata, regional offices at Chennai and Vadodara and inspection offices at all major

equipment manufacturing locations in India. It also has overseas offices at London, Abu

Dhabi, Kuwait, Qatar, Malaysia and Australia. EIL has a large number of site offices in

India and abroad.

EIL has two wholly owned subsidiaries, EIL Asia Pacific Sdn Bhd in Malaysia and

Certification Engineers International Ltd. for undertaking independent certification &

third party inspection assignments.

EIL has grown over the years to become a unique organization, the likes of which has not

been created in any other developing country. The last four decades have provided

enormous opportunities to EIL and it goes to the credit of the company to have

successfully met the challenges that came its way.

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Vision

To become a world class globally Competitive EPC & total solutions Consultancy

Organization.

Mission Statement

1. To achieve “Total Customer Satisfaction” while delivering innovative, cost

effective and value added consulting & EPC services at global level.

2. To ensure growth and professional excellence by building intellectual capital and

core competencies.

3. To maximize creation of wealth, value and satisfaction for stake-holders.

4. To foster a culture of participation and innovation for employee’s growth and

contribution through a climate of fairness and transparency in operation.

5. To promote and encourage best practices for Health, Safety, Environment and

Ethics.

6. To achieve prominence in developing, adopting and assimilating state-of-the-art

technologies for competitive advantage.

The Core Values

1. Benchmark to learn from superior role models.

2. Nurture the essence of Customer Relationship and bonding.

3. Foster Innovation with emphasis on value addition.

4. Integrity and Trust as fundamental to functioning.

5. Thrive upon constant Knowledge updation as a learning organisation.

6. Passion in pursuit of excellence.

7. Quality as a way of life.

8. Collaboration in synergy through cross-functional Team efforts.

9. Sense of ownership in what we do.

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Risk Management Policy

EIL is committed to effective management of risks across the organization by aligning its

risk management strategy to its business objectives through instituting a risk management

structure for timely identification, assessment, mitigating, monitoring and reporting of

risks. Risk management at EIL is the responsibility of every employee both individually

as well as collectively.

“AIMS AND OBJECTIVES” of Company

To provide services of high quality in process design engineering, detailed

engineering, procurement, construction as well as overall project management in

oil refining, oil/gas processing, petrochemicals, fertilizers, chemical process

industries, metallurgy and mining, offshore platforms, ports and terminals and

other selected sectors of industry.

To provide engineering and technical consultancy services of high quality in

selected areas of technology such as heat& mass transfer equipment design,

environmental engineering. Energy conservation, safety and risk management,

advanced control of process industries, system studies and software development.

To continuously improve the quality of services to clients and meet client

requirements promptly and economically.

To maintain a sustained rate of growth in turnover and profitability in domestic

and international operations through aggressive marketing strategy.

To foster and accelerate the development of indigenous technologies.

To promote linkage between R&D organizations, engineering organizations,

equipments manufacturers and operating companies in order to modify, adapt and

upgrade technologies on a continuous basis.

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RESEARCH & DEVELOPMENT

Keeping an eye on the future needs, EIL initiated its Research & Development activities

in 1970. Its R&D Centre is located at Gurgaon on the outskirts of Delhi. The R&D Centre

is manned by about 80 trained engineers and necessary support staff.

EIL has been working closely with operating companies in setting up pilot plants for

collection of design data, and with National Laboratories and premier technical

institutions and has developed technologies in the fields of petroleum refining,

petrochemicals, non-ferrous metallurgy and hydraulic transportation of solids. EIL’s

R&D has made significant contribution towards process design of a number of units such

as aromatics extraction, visbreaker, acrylates, transportation through slurry pipelines,

propane deasphalting plants, etc. EIL is currently carrying out research programmes in:

Distillation

Ejectors

Eductors

Incineration

Furnaces

Solvent Extraction

Simulation/Computer Aided Design

Commercialization

Non ferrous metallurgy

Computer software is also being developed for data reconciliation, batch scheduling,

etc. and for rigorous simulation of specific refinery processes.

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COMPANY’S HISTORY

1965 Foundation of Engineers India Limited.1967 EIL became a wholly owned Government Company.1969 Diversification into Petrochemicals.1970 Creation of Heat & Mass Transfer Design and Computer Services Departments.1971 Ocean Engineering Department formed.1972 First Metallurgical Project.1973 Procurement office opened in London

Entry into Fertilizer and Pipeline projects.1974 First Overseas assignment

Inhouse process design/engineering, technology development.1975 Installed a third generation computer system.1976 Training Division formed.1977 First Oil & Gas processing project.1975-1980

Development of skills in the areas of Process Plant services e.g. Operations, Safety, Materials, and Environmental Engineering.

1981 Use of computers at construction sites, Procurement office opened in Tokyo.1983 Own office complex - EIL Bhavan occupied, Independent Certification Division formed.1989 Own R&D Centre at Gurgaon.1992 Engineering Office opened in Qatar, Joint-Venture with AMEC, UK.1993 Regional Offices opened in Chennai & Vadodara.

1994

Creation of subsidiary - EIL Asia Pacific Sdn. Bhd ISO 9001 Certification

Peak export earnings.

1995 Six Percent Disinvestment

Formation of Subsidiary-Certification Engineers International Ltd.1997 Four per cent equity for employees.1998 Diversification into LNG and Refinery Residue based Power Plants

1999

EIL enters into Turnkey Contracting-Undertakes turnkey projects in the areas of Offshore Platforms and Offsite Automation

Highest Dividend of 150% paid.

2000 EIL’s MOU rating highest amongst all PSUs under the Ministry of Petroleum & Natural Gas.

2001

Major diversification into several new infrastructure and other areas.

EIL’s MOU performance improved to 1.017 (in 2000-2001) and is ranked no. 1 amongst the PSEs under the Ministry of Petroleum & Natural Gas

2002 Major Breakthrough in Turnkey Contracting. ONGC awarded the prestigious MNW Platform to EIL on Lumpsum Turnkey basis

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AWARDS & ACHEIVMENTS

2008 Amity Award for Best Engineering Consultancy Services.

2008 PetroFed award for ‘Best Women Executive of the Year’ to Ms Vartika, AGM (Process Design & Dev.)

2007 EIL received a shield and a certificate from Abu Dhabi Company for Onshore Oil

Operations (ADCO) on for successfully completing 5 Million man-hours without Loss Time incident at their Tank Farm Upgrade Facilities Project, Jebel Dhanna.

2007 Hindalco awarded a “Certificate of Recognition” to EIL for achieving a landmark of 1.16 million accident-free man-hours at Muri Alumina Brownfield Expansion Project.

2007   Appreciation letter from Pune Municipal Corporation for bringing about noticeable improvement in quality and reliability of various projects like roads, drainage systems etc.

2007 Fifth time recipient of Indira Gandhi Shield (1st Prize) for Rajbhasha Implementation (2005-2006)

2007 World Intellectual Property Organisation (WIPO)’s Certificate of Merit to Dr. S Banik,

Chief Consultant, for Co-inventor of Best Invention of India for commercialization of Novel Process for Removal of H2S and Mercaptans from LPG through CFC.

2007 EIL amongst Most Admired Companies in Construction World magazine (Nov. 2007 Issue)

2007 EIL bagged two National awards from Public Relations Society of India for the following:“Aap Aur Hum”- 1st “Hamara EIL (In Hindi Category) - 3rd Prize

2006 CDC National Award for Excellence in Consultancy Services 2005 for execution of Capacity Expansion-cum-Modernization Project Phase-I of KRL.

2006 Merit Certificate for Excellence in the achievement of MoU Target for the year 2003-2004 by Hon’ble Vice President of India

2006 EIL ranked at 142 in the list of ET 500 companies (published in February 2006) up from 311 an year ago based on an average of eight separate factors

2006 EIL has been ranked at 26 in Business India’s Top 50 PSUs based on the Market Capitalization

2006 NRDC award for innovation and commercialization of CFC Technology of EIL-R&D and IOC-R&D

2006 EIL bagged two National awards from Public Relations Society of India for the following:-          “Aap Aur Hum”- 3rd -         “Corporate Brochure” - 3rd Prize

2006 Fourth time recipient of Indira Gandhi Shield (1st Prize) for Rajbhasha Implementation (2004-2005)

2006 Appreciation from M/s HEISCO for completing the job of Heater and Boiler Safety

Upgradation and Emission project of KNPC, Kuwait in record time as Engineering Consultant

2006 Certificate of appreciation for achieving over 36 million accident free construction man-hours at the PTA Project of IOCL at Panipat.

2006 Certificate of appreciation for achieving 10 million accident free construction man-hours at Refinery Expansion Project of IOCL at Panipat.

2006 EIL received a shield and a certificate from Abu Dhabi Company for Onshore Oil

Operations (ADCO)for successfully completing 1.5 Million man-hours without Loss Time incident at their Tank Farm Upgrade Facilities Project, Jebel Dhanna

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COMPANY STRUCTURE

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MAJOR COMPETITORS OF EIL

Larsen & Toubro (L&T) - Engineering and Construction in major

engineering disciplines like civil/structural, plant design/mechanical, electrical,

and process control/automation.

Bchtel corporation- construction & engineering in discipline like

civil/infrastructure, mining & metals, oil, gas, chemical & power.

Punj Lloyd Limited- It is a transnational company specializing in the

energy and infrastructure sectors. Its business areas include Offshore

&Onshore Field Development, Pipelines, Tankage & Terminals, Power,

Civil Infrastructure, Asset Management, and Telecom & Broadband.

Tata Consultancy services-Consulting, IT Services, BPO, IT Infrastructure

Services, Engineering & Industrial Services, Product Based Solutions.

NABORS INDUSTRIES LTD.- Nabors Industries, Ltd. operates as a land drilling contractor. It conducts oil, gas, and geothermal land drilling operations in the United States, Alaska, Canada, South America, Mexico, the Caribbean, the Middle East, the Far East, Russia, and Africa. The company also operates as a land well-servicing and workover contractor in the United States and Canada. In addition, Nabors Industries provides offshore platform workover and drilling rigs that offer well-servicing, workover, and drilling services. Further, the company offers a range of ancillary well-site services, including engineering, construction, maintenance, well logging, directional drilling, rig instrumentation, data collection, and other support services; and logistics services for onshore drilling in Canada using helicopters and fixed-winged

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aircraft. Additionally, it manufactures and leases or sells top drives for a range of drilling applications, directional drilling systems, rig instrumentation and data collection equipment, pipeline handling equipment, and rig reporting software. Nabors Industries also invests in oil and gas exploration, development, and production activities. The company’s customers include oil and gas companies, foreign national oil and gas companies, and independent oil and gas companies. As of December 31, 2007, its fleet of rigs consisted of approximately 535 land drilling rigs, approximately 564 domestic and 173 international land workover and well-servicing rigs, 35 offshore platform rigs, 12 jack-up units, and 4 barge rigs, as well as various trucks and fluid hauling vehicles. The company was founded in 1968 and is based in Hamilton, Bermuda.

SAAG RR INFRA LTD. - SAAG RR Infra Limited operates in the construction industry. It provides solutions for large-scale infrastructure projects, such as oil and gas projects, including pipeline, work over rig services, and other specialized services; water and sewer comprising water and sewerage treatment plants, and pipeline works; and general, institutional, and industrial buildings. SAAG RR serves industrial clients and government departments. The company was founded in 1995. It was formerly known as Kaashyap Foundations Limited and changed its name to RR.COM Limited in 2000. Later, the name was changed to RR Greenhands Infrastructure India Limited in 2002; and to SAAG RR Infra Limited in 2004. The company is based in Chennai, India. SAAG RR Infra Limited is a subsidiary of SAAG Consolidated (M) BHD.

VELOSI LTD. - Velosi Europe Limited provides quality assurance and

quality control services to oil and gas companies. The company was founded in

1982 and is based in Reading, United Kingdom. Velosi Limited follows a

strategy of entering new geographic markets, expanding existing markets

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through joint venture and acquisitions. Velosi Limited also announced that the

Group continues to evaluate appropriate acquisition opportunities. Dr. Nabil

Abdul Jalil, CEO, commented: “With revenue growth across all areas of the

globe, 2007 has been a year of expansion for the Group, both through our

extended service offerings and through our acquisitions. Market conditions

remain favorable and the Board is confident on the outlook for 2008.” The

company announced that it would follow the same strategy of growth in 2008.

OTHER MINOR COMPETITORS:-

Private Sector

FLOUR DANIEL, TECHNIP-KTI, L&T-CHIYODA, TRIUNE, TOYO INDIA, SPIC TECHNIP, UHDE, CHEMTEX, LURGI, TCE, H&G, JOHN BROWN, HHI, SAMSUNG.

Public Sector

MDL, HSL, CSL, PDIL, MECON, FEDO, RITES. 

SWOT ANALYSIS

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STRENGTH:

Strong Business Position EIL is the only Indian consultancy organization which

is capable of taking up large and mega projects in a wide range of Process

industries for execution.

In addition, it is the only company to have undertaken all aspects of refinery

projects including basic design. The company has thus built up high brand equity

with both technology suppliers and end users.

Flexibility to work Across Areas EIL possess expertise in a wide range of

industries by availing of the synergy available across a wide range of industries in

terms of designing and engineering practices, similarity of equipment and

materials and applicability of codes. This has helped EIL to diversify business

risk so that downturns in any one industry would not unduly affect EIL’s income.

Human Resources EIL’s main capital is intellectual in nature. Among all

companies including foreign MNC consultants, EIL has the largest manpower

base which is rated quite high in terms of capability.

Strong Financial Position EIL has demonstrated consistent profitability since

inception which has contributed to a high level of internal accruals. As on date,

the company has no borrowings. The reserves as on March 31, 2008 are

substantial at around Rs. 1001 crores against an equity capital of Rs. 56.16 crores.

Bright Growth Prospects The Indian hydrocarbon sector has been opened up to

private sector participation. This is expected to increase the level of investments

thus opening new growth opportunities for EIL

WEAKNESSES:

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Internal disputes amongst employees.

Most of the efficient employees do not have long term interests in the company.

Laid back attitude possessed by many employees in the organization.

There is no synergy between strategy and implementation.

Work is done on stated guidelines, so lack of innovation is here.

OPPORTUNITY:

It is the one of the number1 company of Asia among consultancy services. Now it

is diversifying to be number 1 company of the World.

A new trend which seems to be emerging is that global engineering consulting

companies have started acquiring specific technologies in order to create entry

barriers. Therefore it is perceived that access to technology will become

increasingly important in future. Anticipating these changes, EIL has already

entered into strategic alliances with specific suppliers for specific technologies.

These would allow EIL to enhance its business through access to new markets

and exposure to latest technologies. However, it is more likely to be available

along with equity participation.

THREATS:

Changing Business Scenario In the past, EIL had a near monopoly position due

to various reasons. The liberalization measures initiated by the Government have

brought about a change from cost plus method of bidding to the LSTK method of

project management. EIL currently does not have enough experience in terms of

bidding for projects on a LSTK basis.

Increased Competition The entry of private sector participants in the Refinery

sector due to the liberalization measures initiated by the Government have seen

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the entry of a number of established multi-national companies into India like

power gas & Bechtal Corporation, Flour Daniel etc. These companies are

expected to increase the competition levels for EIL.

Access to Technology Increasingly, global engineering consulting companies

have started acquiring specific technologies in order to create entry barriers.

Therefore it is perceived that access to technology will become increasingly

important in future. In such a scenario, EIL ability to source technology will

become important.

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FINANCE & ACCOUNTS DEPARTMENT

Engineering India Limited is a large consultancy Organization in the field of Petroleum

Refining, Petrochemicals, Oil and Gas Processing etc. providing services such as Project

Management, Detailed engineering, Procurement, Construction and other technical

services.

Finance and Accounts Division has two distinct departments namely; Finance

Department and Accounts Department.

Finance Department is performing services related to EIL’s clients as well as assisting

the management of EIL in arriving at managerial decisions requiring financial analysis.

Finance Department performs the functions of pre-audit of the Procurement and

Construction Proposals related to various ongoing projects of the various clients where,

EIL has been entrusted with the responsibility of procurement, tender award and

construction supervision by the clients and also for in-house purchase contracts and

accords financial concurrence on various marketing and LSTK proposals.

Accounts Department on the other hand has been entrusted with function of recording

the managerial decision in monetary terms with an emphasis on time, accuracy and cost

to the satisfaction of the related agencies and individuals.

Accounts Department has been entrusted with all the accounting functions of the

company such as making and receiving money whether in the form of cash or in the

form of negotiable instruments from the suppliers and employees, generating invoices for

the services rendered, preparing and payment of payroll etc. and recording of all the

transactions with proper provisions of expenses and income so as to come out with a

statement representing the profit and loss of the company and also with a statement

representing the assets and liabilities of the company giving a true and fair view of the

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affairs of the company on quarterly basis and for the financial year ending on 31 st March

to meet the statutory requirements.

The Finance and Accounts Division has deployed persons equipped with sufficient

experience and qualifications at various levels in the field of Finance and Accounts, and

have been provided with adequate facilities by way of computers, communications and

secretarial assistance. The endeavor of delivering the assurance on quality is through a

well-documented quality system and audit.

The Division has handled the needs of Company at commercial and statutory plans with

an unblemished track record and our Annual Accounts have the recognition of

Professional Institute such as “The Institute of Chartered Accountants of India”.

The Division has also given qualitative support to other Divisions such as Marketing,

Personnel and Administration, Procurement Division for in-house requirements and also

other Division have been categorized and listed respectively under Functions of Finance

Department and Functions of Accounts Department.

“FUNCTIONS” OF FINANCE & ACCOUNTS DEPARTMENT

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As the Finance and Accounts Division has been distinctly working as two independent

departments namely Finance Department and Accounts Department, the functions of this

division have been categorized and listed respectively under Functions of Finance

Department and Functions of Accounts Department.

FUNCTIONS OF FINANCE DEPARTMENT

Scrutiny and vetting of Marketing Proposals.

Framing and vetting of agreements with clients and negotiation with clients regarding prices, commercial conditions and various other agreement clauses.

Foreign collaboration and Government approvals.

Scrutiny and vetting of project and construction proposals for clients.

Pay fixation of employee’s benefits.

Financial vetting of EIL Purchases and Price negotiation with vendors.

Preparation of man-hour rates and overhead rates, office maintenance etc.

Scrutiny of Administration Proposals for EIL property / office maintenance etc.

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FUNCTIONS OF ACCOUNTS DEPARTMENT

Payment to employees for personal claims like Medical, Expense Reports, LTC, Local Conveyance and disbursement of House Building, Conveyance, Loans, and also payment to landlords for company’s accommodation on behalf of employees.

Time sheet accounting in respect of Head Office, Inspection Offices, Field Offices, Foreign Offices, Generation of Billing Report, Status Report on man-hour utilization on different jobs for use by Project Manager/Management.

Corporate taxation.

Preparation of Capital & Revenue Budgets for EIL.

Invoicing to clients i.e. raising of Monthly Invoices, Accounting of Receipts, Follow-up with Project Coordinators, Clients for outstanding amount.

Payroll accounting i.e. preparation of monthly pay bill of Head Office and Head Office controlled Field/Inspection Offices, income-tax of employees, maintenance of Loan Ledger of employees to ensure regular monthly recoveries and charging of interest.

Payment of vendor bills for supplies, services, maintenance contract, purchase of capital equipment etc.

Accounting of Print Room, Telephone, Fax, Telex expenses.

Maintenance of Bank/Cash Account and Investment of surplus funds of the Company.

Finalization of Accounts of the Company, preparation of Balance Sheet, Profit and Loss Account and Coordination with Government/Statutory Auditors.

Processing and consolidation of Interest Accounts in respect of Field, Inspection, Foreign Offices.

Maintenance of Property Register of Company’s assets.

Coordination with self-accounting Units, issue of guidelines for finalization of accounts and to ensure timely receipt of final accounts of the Units.

Release of foreign exchange for tours abroad, arranging Bank Guarantees and opening of Letters of Credits.

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Opening and closing of bank accounts and transfer of funds to Sites and Branch Offices.

The financial terms on which projects are awarded vary from the

cost-plus Method to the Lump sum Turnkey method as shown

below:

Financial Terms of Projects:

METHOD DESCRIPTION

Cost plus or (Time plus &

Material plus)

Consultant is reimbursed for the

actual effort based on a man-hour rate

which has in-built margins

Lump sum fee The entire consultancy effort is

estimated and quoted for as one figure

Lump sum Turnkey (LSTK) Consultant is responsible for

engineering, design, procurement,

construction & commissioning within

overall financial limits

In the past, most of the projects executed by EIL were on a cost-plus or a lump sum basis

which had limited emphasis on time and costs and therefore had low financial risks. As a

consequence, margins, though limited were protected.

On the other hand, the trend abroad is that a significant number of projects are undertaken

on a lump sum turnkey basis (either the whole project or the project divided into two-

three modules each of which is executed on a turnkey basis).

Domestically too, it is expected that LSTK would be increasingly preferred

30

Over the other methods as the customer will benefit by way of reduced costs and on-time

implementation.

As far as the consulting companies are concerned, project execution on LSTK basis will

involve the ability to conceptualize, monitor and implement projects by adhering to time

and cost schedules. If the project has not been properly estimated in terms of

organizational effort and time, the consulting company could face penalties. Thus, taking

on large projects on LSTK basis may be riskier for a consultancy company. In addition,

the consultant may be required to provide funds for temporary periods during project

implementation. Also the ability to arrange long-term finance for execution of the

projects assumes importance.

In addition, strong bidding skills and strong linkages with suppliers /subcontractors

/technology licensers will also be important. Presently, EIL’s capability to take on

projects on a LSTK basis is relatively limited. The company is in the process of

improving internal systems in order to progressively switch over to this method.

31

SEGEMNET WISE REVENUE OF LAST 5 YEARS

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SEGMENT WISE PROFIT FOR LAST 5 YEARS

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consutancy & engineeringprojectslump sum turkey projects

ORGANISATIONAL STRUCTURE OF THE DIVISION

The Finance & Accounts Division is headed by Divisional Head, who reports to Director

(Finance). He is assisted by Heads/ In-charges of the following departments/sections:

Accounts Department Finance Department

The Finance & Accounts officers posted at various sites outside Delhi report

administratively to respective RCMs /Heads of Offices for all functions. However, the

Finance and Accounts Officers posted at Regional offices outside Delhi reports

administratively to respective Head of the Office and functions reports to Dy. General

Manager of Accounts Division.

In the absence of Divisional Head, his work is looked after by the authorized officer.

In the absence of Head/ In-charge of any department / sections, his work is looked after

by a person nominated by the authorized officer.

In the absence of any dealing officer, his work is looked after by In-charge and / or by a

person nominated In-charge.

33

VARIOUS DIVISIONS/ ACTIVITIES LINKED WITH FINANCE & ACCOUNTS (F&A)

1. TIME SHEET

The purpose of the payroll system is to allocate the direct payroll cost to respective job

on the basis of time-sheet which contains the job number and time worked by each

employee during a fortnight / month.

SCOPE

This covers all the employees on regular payroll of the company.

2. CASH / BANK DIVISION

Making cash, Cheque / draft payments telegraphic transfer on the basis of approved

documents and proper accounting of the same.

Receipt of cash, Cheque / draft from employees, clients, regional /zonal / officers / sites

and proper accounting of the same.

SCOPE

The main activities covered by the Cash and Bank section are listed below:

Cash Payments

Cash Receipts

Cheque Payments

Cheque Receipts

Bank transfer of employee’s payments like salary, lease rent, medical bills,

and Uniform minor repair claims, bonus, LTC, out of pocket claims etc.

Foreign Exchange Receipts

Foreign Exchange Payments

Transfer of funds to site branch offices / regional offices / zonal offices

34

Opening and closing of bank accounts at Head office and for sites branch

and foreign offices including amendments

Opening of letter of credit and issue of bank guarantees

Investment of Surplus funds

Payments to landlords for company leased (self and private) accommodation

Reconciliation of bank accounts

Reconciliation of accounts heads 140, 161, 162 and 209

Attending to Auditors.

3. VENDOR PAYMENT DIVISION

Vendor Payment Division deals with the billing to clients and recovery of outstanding

dues. This procedure will enable the Accounts department (Billing group) to follow a set

system for raising the invoices on various clients and the subsequent follow-up of

outstanding dues.

SCOPE

The scope of work of Billing Group is to raise the invoices under the following

category of Jobs:

Cost plus percentage fee without ceiling.

Cost plus percentage fee with an overall ceiling.

Fixed Man hour rate / Man month rate plus out of pocket expenses.

Lump sum jobs.

Lump sum job with certain expenses (e.g. Travel cost or Advertisement

cost) on reimbursable basis.

Inspection / HMTD jobs with fee at fixed percentage of equipment cost.

Turnkey Jobs.

Miscellaneous Jobs.

35

4. PAYROLL DIVISION

The Payroll Division of the company enables the employees to know the procedure of

making the Payroll in accordance with the Rules of the Company. This would also enable

them to know the time frame for payments.

SCOPE

The main activities of the Payroll Group are listed below:

Preparation of Payroll of each and every employee.

Processing of loan and advances.

Processing of Income-tax calculations.

Processing of Conveyance allowance / Conveyance reimbursement.

Processing of Family Pension.

Processing of Gratuity claims.

5. MEDICAL / EXPENSE REPORTS GROUP

The main activities covered by the Medical / Expense reports group are following:

Processing of Medical claims.

Processing of Expense Reports.

Processing of LTC claims.

Processing of Sea Allowance claims of employees.

Entertainment Reimbursement.

Processing of Entertainment claims.

Control of Personal ledger of employees relating to tour / medical /

miscellaneous advance.

6. BUDGET DIVISION

36

In EIL Zero Base Budgeting (ZBB) technique is used to prepare Budgets biannually.

ZBB is defined in EIL as a financial / quantitative statement presented prior to the

end of the budget period (financial year) with each budget estimate starting from

scratch and with fresh justifications of each estimate. Estimates by nature can never

be 100% correct, however while estimating / projecting of efforts (expenditure / man-

hours), proper justification must be examined and closely scrutinized so as to at

“Prudent and True Estimates”. The aim of the Budget exercise is to provide the

Management with a true picture of company’s projected performance and thereby

enables it to take tactical / strategic based on efficient utilization of available

resources.

SCOPE

Scope defines the activities undertaken by the Budget Section to achieve the above

purpose. The main activities covered by this section are as follows:

To prepare biannual (original / revised) budgets with respect to both Capital

& Revenue items.

The Revenue estimates include Man-hour & Expenditure estimation for

each job coordination in EIL.

The Capital estimates include expenditure done in acquiring Fixed Assets

like Land, Building, Computers, and Books etc.

Income is recognized based of the payment terms. Broadly the type of jobs

executed by EIL can be categorized as Lump sum (LSTK). Income is

recognized for each of the job executed in EIL.

Estimates of efforts in Expected Jobs are also considered in Budgeting

process and the inputs are received from Marketing in consultation with

various Divisions.

Regular reporting to Ministry of Petroleum & Natural Gas, Department of

Public Enterprise, and Planning Commission is also done through Budget

Section. Some of the major reports are Performance Budget, Internal &

Extra Budgetary Resources, and Annual Plan etc.

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7. PROJECT PURCHASE DIVISION

Project Purchase division provide pre-auditing services to undertakes the procurement

of equipments, plants and machinery for and on behalf of various clients for projects

undertaken by EIL.

SCOPE

Project Purchase Division provides following services:

That the best available material is bought at the lowest available prices.

That the procedures and policies laid down for Procurement activities in

consultation with clients are being followed and the same are not diluted.

That the Procurement activities are completed within the scheduled time.

That the selection of vendor(s) is unbiased and is based on competitiveness.

Reasonability of price is established for sole offers / STA offers before

according Finance approval.

8. CORPORATE TAXATION WORK

The main activities covered under the corporate taxation work are listed below:

Preparation of details for computation of Assessable Income.

Payment of Dividend Tax under section 115-0.

Payment of Installments of Advance-Tax and self Assessment Tax.

Filing of Quarterly Returns regarding tax deducted at source in case of non-

resident in Form No. 27.

Reconciliation of 241 A/C (advance tax paid and TDS certificates received

from clients)

Filing the Income Tax Return.

Filing the Wealth Tax Return and payment of wealth tax.

Follow up of pending cases for assessment rectifications and appeal.

Tax Audit Report.

38

Obtaining Income Tax Clearance Certificate (I.T.C.C.)

Finalization of Account of the Company

It is the requirement of the Companies Act to close the books of accounts every year to

give true and fair view of Profit & Loss, the statement of assets and liability owned by the

company as on a particular date.

The main activities covered by the General Accounting section is coordinating among all

sections of the company to give the desired result of presenting the facts and figures to

the Management , Government & C.A.G and Stock Exchange of company act, 1956.

OBJECTIVES OF STUDYT

39

The major objective of the study was to get an understanding of financial activities as

done in EIL. Also to understand the process adopted starting from undertaking a

project to its completion. This broad objective was then further classified in to smaller

objectives which are as follows:

Understanding the Organisational Structure of EIL and its Businesses.

Understanding the role of different departments in Finance, especially the

Cash & Bank Department- Investment of Surplus Funds and a study of Lump

sum Turnkey Projects.

Getting insights about the functioning and activities performed by the

company and banks in relation to its surplus money.

Understanding how EIL makes clients for various activities like Projects

(LSTK), Banks, etc. I also came across in knowing the procedures of Bidding,

Quotation, etc. on which EIL makes clients

Sources: Collection of Data includes making plans regarding how to proceed for gathering

information and data. Here in this research we will use both Primary and Secondary

sources of data. Personal interaction was done for Primary data. However the research

will rely heavily on Secondary data sources.

40

41

OBJECTIVE OF THE STUDY

The objective of my study to understand the PROCEDURE of cost estimation for lump

sum turnkey projects in EIL, including the process of selecting various material &

equipment for the project at minimum cost.

My sub-objective was to understand the various risks involved in such

projects and what all procedures the company follows to overcome it.

INTRODUCTION TO LUMP SUM TURNKEY PROJECTS

In view of the change in the mode of contracting and in line with its vision of becoming a

globally competitive EPC organization, EIL has successfully started venturing into

turnkey contracting and has executed number of contracts. Under this mode, EIL takes

single point responsibility for managing all elements of project execution viz., basic and

detailed engineering, procurement, plant construction, erection, start-up and

commissioning. EIL has also implemented several Onshore and Offshore projects worth

over Rs. 1850 Crore on turnkey basis. Projects worth over Rs. 1230 Crore are currently

under execution.

LSTK PROJECTS:

These are lump sum turnkey projects wherein EIL just not only provide

consultancy but undertakes the whole responsibility to complete the whole project of its

client on time, for which it charges a fixed amount of money depending on the cost to be

incurred on that project.

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LSTK is a lucrative deal for both the parties as through this client gets the

surety for its project to be done on time and EIL gets an opportunity to earn huge profits

from the difference amount of ESTIMATED COST & ACTUAL COST incurred on the

project.

WORKING OF LSTK DEPARTMENT:

Cost estimation:

The first and foremost work of LSTK department is to ascertain the total cost of the

project, which EIL charges from its clients including its profit margins.

Costing of different projects depends upon the kind of projects undertaken and varies

accordingly.

There are various factors like change in market situation, monopoly of a vendor &

inflation/deflation etc which results in the change of the cost of the project in comparison

with the budget prepared. For example,

A budget is prepared for a project, in which the expected expenditure for various items is

as follows:

Insulator Rs1, 00,000

Heat extinguisher Rs.1, 22,000

Constructor Rs. 75, 000

But due to monopoly created in the market the company is not being able to get thee

insulator for price less than Rs 1, 10, 000. But the actual expenditure incurred on heat

extinguisher & constructor was Rs 1, 18,000 & Rs. 69,000 respectively in that case, the

float available with company is Rs 10,000 so it can purchase that insulator for that higher

price.

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But a situation arises where the company does not have any float available, then it can

use the contingency kept for that project with the approval of top management as it

contingency is a part of profit margins of the company. So any decrease in that would

ultimately results in the decrease of profit margins.

There is no standard format or procedure for cost estimation of any project.

But there is a basic structure followed in almost all the projects which is as follows:

2) Design & Engineering : this is a kind of In-house costing. It includes all the

expenses incurred on the employees engaged in providing services like

engineering or designing the project. For e.g. total man hours paid to the

employees against the time rendered by them for that particular project, traveling

expenses incurred in commuting between office and the site.

3) Site Expenses : - This includes the expenses incurred on the development and

construction of the site. For example expenses on Office Expenses, Capital

Expenses (like office equipment & furniture) .Cost for these items is considered at

the present market rate + Future Escalations depending upon the kind of product.

4) Material Cost :- It includes cost of material to be used in a project. For example

Boiler Cost, Steel Cost, constructor Cost & Heat Extinguisher etc. The cost of

these items can be ascertained by the following ways: -

a.) PRE BID TIE UP. This is done before the submission of quotation to

supplier to calculate the right ‘L1” and the tie up depend upon the delivery

period.

b.) IN HOUSE COST ESTIMATE : It is done internally depends upon the

past relation or experience with the supplier.

For example the cost of Boiler to be used in a particular project is Rs 100 in the year

2005 And there have been no technical changes taken place in the kinds of boiler to

44

be used for a project in the year 2008, then the price would be considered as same as

of 2005 with some increment(if any).

5) Sub Contractor : - these are the expenditure incurred on the people engaged in

physical construction of the project. They develop structure in all type of work

like: - civil work, Mechanical Work, Structure work, painting, Insulation etc.

costing for this, again is done through PRE BID TIE UP or on the basis of last

experiences.

6) FE Variation : - It includes the cost which is charged as a cover for fluctuation in

Foreign Exchange Rates and the technique used in determining the cost of

imported item is known as In-House hedging. Under this technique, the data

related to currency rates for past 4-5 years is gathered and then plotted graphically

to ascertain the Upper limit, middle limit and lower limit of the rate. Then the

growth rate for all the limits is considered, and the weighted average rate is

finalized.

7) Risk & Liability : - It is the kind of cover which is made in advance for any kind

of material loss; loss by fire etc depends on the basis of last experience on the

same kind of product. Proper feedback related to same kind of past projects is

necessary to determine this cost.

8) Insurance: - Insurance as per client requirement. There are three category of

insurance i.e. BAR (builder all risk) and the second is CAR (constructor all risk)

and the last one is professional indemnity i.e. due to the knowledge loss on the

part of EIL.

9) Contingency : - As per past experience, 5% contingency is considered as standard

and is charged on the total cost of the project. The amount of contingency is

estimated by the “LEVEL OF CONFIDENCE” showed by concerned

departments.

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Standard amount:

Man-hour ------------- 5% of the project cost as standard

Travel----------------5% of the project cost as standard

Material------------- (depend upon the MTO accuracy)

10) Margin : - This is the ultimate profit margin earned by EIL, which is based on the

opportunity cost of time and effort of EIL, standard rate prevailing in the industry

and the influence of the competitors.

Procurement of the material:

The actual work of EIL starts from the engineering department who prepares material

take off (MTO) and generate material requisition (MR) to C&P department.

C&P department further adds Engineering MR and commercial portion to it.

Engineering MR includes technical specification required for the project and commercial

portion includes cost estimation and checking of financial viability.

After this C&P department issues Requisition for quotations (RFQ) to either

EIL’s listed vendors or by notice inviting tenders (NIT). NIT can be made to both

Indian as well as foreign bidders but still foreign bidders are not preferred much to avoid

FEMA Regulations.

Bids are invited in two parts:

1). Commercial + Technical = UNPRICED BID

2). PRICED BID

Purchase procedure covers the following:

Purchase of equipments, materials, spares, services etc from indigenous and

foreign sources are required for the project.

Selection of bidders and issue of request for bids (RFP).

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PURCHASE PROCEDURE FOR INDIGNIOIS ITEMS:

Mode of procurement-

Whenever client’s contact with EIL makes it mandatory to procure from bidder’s listed in

the contract, procurement for projects shall made on limited Enquiry basis, irrespective of

the value of order. However, for the items not converted in such mandatory bidders list in

EIL’s contact with client, EIL ‘s DOP shall be followed.

Whenever it is not mandatory to procure material from bidders listed/ approved by

clients, EIL’s DOP is allowed.

Project bidders list:

Whenever RFBs are to be issued on limited basis, the bidders list for each item shall be

developed as detailed below:

All the bidders listed in the clients contract document shall be selected for issue of

RFB expect for bidders on Holidays list of EIL/ client. Capacity range restrictions

shall be followed as per EIL’s MSL data. The list can be further supplemented by

project manager. Bidders added by project manager will be informed that their

offer is subject to approval of clients. Price bids of such bidders will be opened

only if client’s approval is reached.

Whenever the clients bidder list is not available for any item, RFB shall be issued

to all the bidders listed in the EIL’’s MSL.

For items where bidders list is not available I contract and also in EIL MSL, the

bidder list shall be furnished based on inputs (with respect to known

manufacturers/bidders of similar material/equipment) received from PDD/

Engineering/PMC/client/ other operating companies and / or through internet.

Approval o bidders list shall be as per DOP.

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BIDDING PROCDURE:

A). TWO BID SYSTEM

In two bid system, the enquiry shall specify the receipt of bids in two cases in two

separate sealed envelopes viz.

a) UNPRICED BID:

One sealed envelope containing 4 copies ach of compliance to technical

requirement, delivery schedule with all commercial condition and unpriced copies of

price schedule.

b) PRICED BID:

Second sealed envelope shall contain original priced bid.

Both unpriced and priced sealed envelopes are to be put in a common sealed envelope.

CATEGORISATION OF MRs:

Project/ engineers may identify where ‘no deviation bids’ are to be invited and in such a

cases TQ/TBA may not be issued by engineering.

BULK ITEMS ON ROLLING MTO:

Procurement of bulk items like pipes, fittings, flanges, valves, cables etc. can be restored

to either by processing MRs against each MTO or by entering into rate contarcts to save

time and efforts on processing the MRs/ Enquiry & recommendation/ ordering. The

decision regarding items, applicability and period of rate contract will be taken by project

manager in consultation with engineering and C&P. the rate of contract. if any, will be

finalized as follows:

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C&P Department will issue enquiry, based on the first MTO MRs as follows:

The inquiry shall contain instructions to vendors that the quantities against each

items as indicated as initial quantities which may increase up to 100% or reduce

by 25%.the quoted unit rates should be valid for a rate contract for issue of

purchase order for 12/24 months, starting with an initial purchase order for the

indicated quantities(less 25%, if required). Prices will be governed as per price

variations formula given in FRB.

The recommendation shall be decided on the items wise L1 bidder basis for

entering into a rate of contract. The slabs will be advised to engineering, by C&P,

Prior to issue of MR. In case of few items are not in range of a particular

bidder(for slab wise evaluation), such bidder will be allowed to source these items

from any EIL approved supplier.

The first MTO shall be ordered on the basis of rates established, through purchase

orders, on various vendors for different Items.

For requirements as and when firmed up (MTOs), within the validity of rate

contracts, the orders for such items shall be placed using Rate Contracts within

the validity through Call Off Orders (COO).

Whenever Rate Contract is being operated COO can be issued without financial

vetting.

BASKET CONCEPT:

In order to save cost of inspection & expediting, transportation, vendors data requirement

etc., items of similar specifications / requirement (e.g. pressure vessels, Exchangers,

columns, air coolers, in column internals etc.) may be grouped together as a basket in the

49

RFB documents. The decision regarding such grouping shall be taken by C&P in the

consultation with the project after receipt of MR. Evaluation and Ordering of such

grouped items shall be done on the bottom lines basis.

The stipulation regarding group wise comparison shall be clearly indicated in the enquiry

document. Bidder shall be required to quote only total price of each group. Distribution

of total price for the purpose of billing & PRS shall be given by EIL as percentage of

total price. PO shall indicate item wise prices calculated based on percentage specified in

RFB.

INSTRUMENTATION ITEMS:

Whenever possible the instrumentation items shall be procured by bunchimg identical

items, and one data sheet for each type of instruments will be made with tag numbers

falling into that category.

REQUEST FOR BID:

C&P Department will issue request for bid (RFB) to the approved bidders.

The RFB shall normally be issued to bidders allowing 2 weeks of time for bulk

items, 3 weeks time for others and 4 weeks for imported items & Package for

submission of bids expecting proprietary r single source items where enquiry

could be issued with lesser time for submission of offer. For bulk items, not

covered in rate contracts, shorter period may be given with the approval of project

manager.

The request for bids shall be hosted on EIL website with user ID/ Password issued

to selected bidders. C&P may issue RFB on CD as well, whenever it is felt

necessary to expedite offers.

50

In case any bidder seeks clarification from company’s reply has an effort on

scope/ requirement, the change accepted, if any, will be communicated to all the

bidders before the due date.

Enquiries will not be issued to the bidders on ‘Holiday’ or in case of bidder is

deleted from EIL MSL. The unpriced bid/ price bid of the bidder shall not be

opened if the bidder is put on holiday list after issue of RFB.

Initially bids shall be generally called for with a validity of 2 months from the bid

due date in case of indigenous supply MRs and 3 months for all packages and

foreign / global RFBs. The validity shall be extended further, if required. Offers

with shorter validity than specified in RFB shall be liable for rejection after giving

opportunity to bidders for extending validity as required.

BID OPENNING:

The unpriced will be opened jointly b representatives of C&P and Finance department of

EIL in presence of attending bidders, on the day and time specified in RFB or extended

thereafter. In case bid due date falls on holiday then the next working day shall be

deemed to be the bid due date. A bid response sheet will be prepared and signed by all

the participants in bid opening.

Price bids will, however, be kept unopened till techno-commercial

evaluation is complete.

After obtaining TBA or approved PBO recommendation from complete authority as per

DOP, the priced bids of technical and commercially acceptable bidders along with sealed

in house cost estimates shall be opened jointly by representatives of C&P and finance

departments of EIL in presence of attending technically and commercially acceptable

bidders. Whenever revised prices have been sought by EIL from all the bidders, revised

prices only will be opened. Original price bids will be returned to the bidders. Generally

only price implications will be sought against TQS/ CQS and revised prices shall be

51

sought only in certain expectation circumstances to be recorded and approved by ED

committee.

Offers received in the form of telex/ telegram/ fax/ email in open conditions shall not b

considered.

LATE BIDS AND REJECTIONS OF BIDS:

Unsolicited bids and bids received after the final bid due date and time shall not be opend

and shall not be considered for evaluation.

In case minimum response is not received the bid due date shall be extended by C&P. In

case minimum response is still not received the due date may b suitably extended further

in consultation with approval of project manager.

Minimum of two extensions shall be given after which the offer as received shall be

opened for further evaluation. Any deviation to above provision of clause shall be with

the approval of ED committee.

Minimum response shall be considered as under:

Where the enquiry is issued to five or more bidders, the minimum response shall be

three bids.

Where the enquiry is issued to two- four bidders, the minimum response shall be two

bids.

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SUPPLIERS SELECTION AND RECOMMENDATION FOR APPROVAL:

Each bid both from technical and commercial considerations shall be reviewed

independently and verifications & confirmations from bidders shall be obtained by way

of correspondents / discussions wherever required for preparing a comparable bid

analysis complete in all respect. Wherever no deviations bids are invited TQ/TBA may

not be issued by Engineering. In all other cases where price implication is not predicted,

TQs will be issued by Engineering directly to the bidders. TQ requiring price

implications will be issued through C&P departments. Bidders shall normally be given a

cut off date of one week for furnishing clarification. Extension, if any, will be given with

the approval of project manager. TBA/ recommendations shall be processed based on

clarification received as above. All responses received before approval of TBA shall be

considered for evaluation. Al correspondents/ responses considered for evaluation are to

be listed in TBA.

TBA where ever required shall be released only after receipt of all responses/ price

implications against TQs/ CQs. TBA shall clearly state technical acceptance of the offer

with the acceptable deviations recorded therein and also detailing reasons for rejections,

if any. TBA shall also list out start ups/ commissioning spares madatory and special tools

& tackles etc. to be evaluated. Project shall insured availability of cost estimates in sealed

envelope, prior to opening of price bids. However, in case of bulk items (including

electrical, instruments & piping bulk items) reasonability of prices for STA/ SO items

will be determined by cost engineering after opening of price bids.

BAISIC CRITERIA FOR VENDER SELECTION:

1. Unbiased selection of vender.

2. Beat price is paid.

3. Material specialist.

4. All government’s circulars/ guidelines as received shall be followed, and the

following shall be considered in evaluation:

53

The purchase preference applicable to central PSUs, shall be recommendation as

pr the prevailing govt. guidelines.

This being a LSTK projects, price preference to SSI units shall not be allowed.

Purchase Recommendation:

As soon as satisfactory technical and commercial clarifications are obtained and

the Technical Bid Analysis is received in C&P, C&P Department shall put up the

Recommendation for Price Bid Opening approval, if required or proceed for Price

Bid opening as the case may be in accordance with DOP.

Price Bids shall be opened in accordance with the provision herein above and

C&P Department shall prepare the recommendation for Award.

The lowest evaluated bid which is technically and commercially acceptable shall

be recommended for placement of order.

The recommendation for Award shall be forwarded to Finance for approval of

competent authority as per DOP.

Project shall ensure availability of Budget Provision while approving

recommendation for negotiation or award.

Priced Envelops of not acceptable bidders shall be returned to respective bidders.

SHIFTING:

In order to avoid splitting of order on number of bidders, particularly when order

value is small, shifting shall be resorted to so that time and effort on ordering,

expediting, inspection, etc. is saved in dealing with extra vendors. For the purpose

of shifting cost of ordering (each order) is considered as Rs.25,000/-.

54

1. Based on lowest evaluated item wise prices the shifting shall be carried out

provided the following conditions are met:-

a) Shifting shall be done only if shifting cost of each order is upto Rs.

25,000/-

b) Shifting shall not be resorted to if the value of the order is more than

25% of the total order value of the recommendation. However this

ceiling will not be applicable where total order value of

recommendation is upto Rs. 1.0 lakh.

c) In case the order value on L1 bidder is more than Rs 1,00,000/- then

shifting shall not be resorted.

With above shifting the selected bidder for award will be deemed to be L1

bidder.

NEGOTIATION

Negotiation will be carried out with L1 bidder in following exceptional situations:

Where the rate quoted by the L1 bidder is not reasonable but the requirement is

urgent, and any delay in availability of the item(s) on account of re tender would

jeopardize timely completion of Project.

In case of proprietary items,

Where limited sources of supply are available for the item.

Where there is suspicion of cartel formation.

Negotiation with L1 bidder shall be conducted by a committee as per DOP.

Negotiations shall generally be conducted by the way of meeting. However, in certain

cases, where meetings may not be possible, negotiation may be conducted by the way

of fax or e-mail or telephone or video conference, to be confirmed by a formal letter.

55

In case even after the negotiation with L1 vendor, his price are not reasonable with

respect to in-house Cost estimate, approving authority as per DOP, may decide to

invite best reduced prices/ reverse auction from all technically and commercially

acceptable bidders. Decision for seeking best reduced prices shall be with the

approval of ED Committee(ED-PS, ED-P and ED F&A).

EVALUATION METHODOLOGY FOR PRICE INCREASE/DECREASE

a) Any unsolicited increase/decrease in price submitted by Bidder after bid due date

shall not be considered.

b) Any increase/decrease in price offered by a bidder by the way of price implication

or revised prices against TQ/ CQ will be considered for evaluation.

c) Any increase/decrease in price subsequent to the submission of replies and price

implication, if any on account of TQ/ CQ shall be treated as unsolicited.

d) In case of unsolicited price increase, the Bidder(s)’s such offer(s) will not be

considered for evaluation and recommendation and shall be rejected. In case of

unsolicited price decrease, the bidder(s)’s offer shall be compared as per

originally quoted prices and if the bidder(s) happens to be the recommended

Bidder, the decrease in prices shall be taken into account for ordering. However

above facts shall be recorded in C&P recommendation.

e) Any increase/decrease in price due to validity extension will be considered for

evaluation.

The quoted price for Commissioning and Mandatory spares wherever listed in the MR

and TBA shall be considered for price evaluation.

Supervision Charges (per diem rates) for erection, testing, commissioning and/ or

operation will not be considered in evaluation unless specifically advised in MR/ Project

cover note and informed to bidders in RFB. Number of days for which loading is to be

done shall also be identified by department originating MR.

56

After approval of Recommendation by competent authority, C&P shall issue the Fax of

acceptance followed by detailed Purchase Order within 2 weeks along with Purchase

Requisition.

The itemized prices of 2years Operational & maintenance Spares shall be asked from the

bidder, however same shall not be taken into consideration for evaluation. Validity of

offer for spares shall be requested from the successful vendor as EIL Contract with

Client. Similarly, rates of Annual Maintenance Contract (AMC) will be sought from

Bidders, wherever specified in MR. AMC will not be considered for evaluation of bids

unless specified otherwise by the originating department.

In case of valves, manufacturer’s maintenance contract including material may be

required during commissioning for replacement of seals, packing etc. Such optional rates

will be sought from valve manufactures, if specified in MR. These rates will not be used

for evaluation.

Commercial loadings on account of technical parameters shall be done as per formula

provided in MR and in TBA.

ISSUE OF TELEFAX OF ACCEPTANCE AND PURCHASE ORDERS:

On approval of Purchase recommendation as per DOP, C&P shall issue Fax of

acceptance (FOA) to the recommended Bidder(s). Based on FOA, Purchase Order

shall be prepared by C&P and Purchase Requisition by Engg. (by C&P for items

as agreed with Engineering) and the same shall be sent to Bidder. Bidder shall be

sent to Bidder. Bidder shall be requested to acknowledge receipt of FOA and

return a signed and dated copy for out records.

Suppliers(s) shall be asked to return the acknowledgment copy of the Purchase

Order duly signed and dated as a token of Suppliers’s complete unconditional

acceptance thereof.

57

Fax of Acceptance (FOA) shall be numbered as given below to facilitate project

monitoring:

Indigenous : /0001 to 2999

Imported : /3001 to 3999

COMMERCIAL TERMS & CONDITIONS AND EVALUATION

Commercial Terms and Conditions and its evaluation will be approved by

Committee of EDs of Procurement, Project and Finance.

Purchase Procedure for Imported Items:

Purchase procedure as specified for the indigenous purchase shall also be applicable for

the foreign purchase to the extent it is relevant with additions and/or modifications

described in the following Para:

o Initially bids shall be called for with a validity of 3 months. Shorter

validity may be sought in specific cases with the approval of Project

Manager.

o The request for bids shall be hosted on EIL website with User ID/

Password issued to selected bidders. C&P may issue RFB on CD as well,

wherever it is feel necessary to expedite offers.

o Involvement of Indian Agents

o Foreign manufactures/ bidders shall be asked to submit direct offer

without the involvement of an intermediary as an Indian Agent. However,

if Indian Agents are involved, the Bidder will be asked to indicate the

58

agency commission included in their offer. The payment to supplier(s)

shall be released through L/C after deducting the Indian Agent’s

Commission from the quoted prices. Indian Agent Commission as

included in the offer will be paid directly by EIL to Indian Agent in

equivalent Indian Rupees after satisfactory completion of the order.

o EIL Accounts will arrange necessary foreign exchange and open the

irrevocable L/C etc. after receiving acceptance of Purchase Order & PBG

wherever required from Supplier. C&P shall follow for receipt of PO

acceptance. Receipt of PBG shall be ensured by Project/ Finance.

Wherever, PBG is not received/ delayed in processing, L/C can be opened

for reduced amount (90% where 10% PBG is required) subject to bidder

accepting to bear amendment charges. This shall be part of RFB

conditions.

o It shall be ensured that the items being ordered are not covered in the

negative list of the present EXIM Policy.

o Bills selling rates of Foreign Exchange as available from State Bank of

India or its subsidiary shall be considered. In case, the same is not

available then exchange rate taken from Economic Times will be utilized

for comparison purposes as on the day of Price Opening and a copy of

newspaper cutting will be kept in the file.

Bidder must ensure that for proper & faster communication, the contact personal

details like name, phone no., fax no., email ID & for video conference all relevant

information is available in the offer.

59

PAYMENT TERMS FOR:-

INDIAN BIDDERS (all items)

Where MR is

only for the

supply of

material & no

VDR specified

in MR.

Where the MR calls for

VDR.

All items including Site

work.

Supervision of

Erection/

testing/commissioning.

a.) 90% on pro-

rata basis

against dispatch

document with

taxes, duties

&transportation

charges except

excise.

SUPPLY PRICE:-

a.) 5% on approval of

drawings &

manufacturing schedule

SUPPLY &

TRANSPORTATION:-

Payments shall be as per

MR calls for VDR

except 10% payment for

supply released on

successful completion of

site work.

Payment shall be 100%

pro-rata against

monthly progressive

bill to be submitted by

seller duly certified by

Site-in-charge.

Payment shall be, made

within 30 days of

submission of bills.

b.) 10% on

receipt

&acceptance of

last

consignment of

material at site

& on

submission of

Bank

Guarantee valid

for 3 month.

b.) 80% on pro-rata basis

against dispatch

documents withy taxes,

and duties charges

except Excise duty.

SITE WORK:-

a.) 90% against monthly

running bills duly

certified by Engineers-

in-charge.

c.) 5% on receipt of b.) 10% on successful

60

final/as built drawings/

documents/data/manual

in requisite no. of

copies/set as per VDR.

completion & handling

over of goods /

equipments at site.

d.) 10% on receipt &

acceptance of

goods/equipment at site

& submission of Bank

guarantee.

TRANSPORTATION:-

100% on receipt of

material at site.

PAYMENT TERMS FOR FOREIGN BIDDERS:-

Supplies:-

95% against shipping documents.

5% payment shall be made on submission of final technical documents/drawings

as per vendor data requirement specified in the MR. in case submission of final

technical documents/drawing as per vendor data requirement are not required as

per MR, this payment shall be made along with above.

ALL OTHER PAYMENTS ITEMS FOR FOREGN BIDDERS ARE SAME AS INDIAN

BIDDERS.

61

OTHER TERMS:-

All payments shall be released within 30 days of receipt of invoice & all the requisite

documents, complete in all the respects.

Bank charges of respective bankers shall be to respective account.

Any payments before dispatch of material shall be considered as advance payment. Such

payment shall be interest bearing @13% per annum &released against equivalent bank

Guarantee which shall be valid up to contractual delivery date.

All Bank Guarantee shall be issued through Nationalized Indian Bank/ Indian Scheduled

Bank & the claim period of three month after its expiry.

Sellers require multiple dispatches will be restricted to maximum three dispatches.

REJECTION/LOADING CRITERIA FOR DEVIATIONS:-

A Bid with incomplete scope of work does not meet the Technical requirements shall be

considered as non-responsive & may be rejected.

Bidders are requested to note that expectations/modifications taken by them to the

submission of requisite performance Bank Guarantee including its value, period&

applicability as per guarantee clause of general purchase conditions shall make the mid

liable for rejection.

DEVIATION TO PRICE REDUCTION SCHEDULE FOR DELAYED DELIVERY

(PRS):-

TOV- Total Order Value.

DOV- Delayed order value.

62

S.no Terms offered by the bidders Price loading

1. 1% of DOV up to max. of 10%of TOV NO loading

2. 1% of DOV up to max. of 10% of DOV 2.5%

3. Other Than the above 5%

PRICE VARIATION;-

No Terms offered by the bidders Price loading

1. Firm prices No loading

2. In case of price variation

formula

With ceiling.

Loading by ceiling percentage offered.

3. No ceiling on the formula

specified.

1.5 times the max. ceiling specified by other

Bidders.

4. No formula & no ceiling

specified by the bidders.

Offer may be rejected.

Price loading on account of payment terms at variance with Bidding documents payments

will be loaded@13% per annum for the relevant period.

EVALUTION &COMPARISION OF BIDS:-

The evaluated price of Indian bidders are:-

FOT Dispatch point price quoted by the bidders.

Fright charges up to site as quoted by bidders.

Cost of mandatory spares, if identified in the Material Requisition &

Commissioning spares will be included for evaluation of bids, but cost of spares

of two years trouble free operation shall be excluded.

Commercial loading. If any.

63

Loading on account of technical parameters, if specified stipulated in the Material

Requisition.

Loading on account of commercial terms & conditions & technical Parameters

calculated on FOT dispatch point price.

Purchase preference to central government public sector undertaking shall be

allowed as per government instructions.

If freight charges are not quoted, loading shall be done by maximum freight

quoted by the seller.

TRANSPORTATION:-

Bidders to note that material against this RFQ are required to be dispatched on

door delivery basis through any of the bank approved transport company.

PROJECT AUTHORITY CERTIFICATE (PAC)/ESSENTIALITY

CERTIFICATE (EC):-

Indian bidders may note that the owners will not issue any PAC &EC for availing

the project rate of custom duty on imported raw material. Bidders may consider

the merit rate of duty on imported raw material in the quoted price.

Further no variation in taxes, duties, custom duty & foreign exchange rate for

importation of raw material shall be considered.

BID PRICING:-

In case of discrepancy in ‘unit price’ & ‘total price’ for any item, the quoted unit

price shall prevail for evaluation and ordering.

In bid price no overwriting or use of fluid is permitted. All corrections shall be

signed by the bidders otherwise it shall be liable for rejection.

Finally when a vendor is selected, FOA (fax of acceptance) is sent to him for the

confirmation thereof.

64

Risk management in LSTK projects

Types of risks

2. Price and currency Fluctuations

1. Late completion 3. Overall risk Of the project

LATE COMPLETION OF THE PROJECT: One of the critical risk involve in any

LSTK project is the completion of the whole project on time. To estimate the exact time

for completing a project itself is a difficult task, above that to maintain the pace of work

required to complete that job is even more difficult.

A project can be delayed due to various reasons as follows:

Delivery of material and equipments used in the project is delayed

by the vendors.

Riots and strike outs at the site due to government intervention and

political disturbances.

Inefficiency incurred on the part of EIL’s employees, etc.

In case of any delay which occur due to the default on EIL’s part or if EIL repudiates the

Contract before completion of the services EIL shall be liable to pay the client Liquidity

Damages (LD).

65

LD’s varies from Project to Project for example if the company is enable to complete the

Project within the stipulated time period then the Client can force LD at a rate of 0.25%

of the Total EIL Fee per week of delay subject to a maximum of 5% of the total EIL Fee

or any such smaller amount as may be fixed by the Client.

EIL cover this risk on back to back basis i.e. it charges LD on delay of deliveries from

its vendor. For example a Vendor of Machineries is unable to deliver a machine on time

than EIL as per the Contract with the Vendor would charge 1% (may vary) of the total

value of Contract per week, subject to a maximum of 10% of the Contractual value.

However, if delay occurs due to the reasons beyond EIL’s control like Riots, Civil War,

Strikes etc. EIL approaches its client with full details for extension of time limit for

completion of works.

PRICE AND CURRENCY FLUCTUATIONS: Due to increasing inflation rate, it

is quite a difficult task to predict the prices of various items especially in case of long

term projects. It is becoming next to impossible to ascertain the prices of steel and

cement which have been facing a remarkable increase in the recent years.

“Price escalation” is the strategy used by the company to over come this risk.

Under this, Company quotes the price of the raw material at the time of Contract

and the Client is liable to pay any variations in the price. For this purpose a Price

Variation Statement is prepared and company raises invoice on its client for the

changed amount.

For this purpose a special Clause is included in the Contract stating that “In case of

Escalation in the Cost Estimates which may occur due to reason beyond the control of

EIL, EIL would approach to client with full details of sanction there of .

For example the company incorporates a clause in its contract on the escalation in the

price of steel for a given job then according to contract

The Price Variation is applicable on supply price of bulk steel material for site

fabrication /construction for permanent incorporation in work i.e. for structural steel

66

(reinforcement bars & steel grating plates only). The contract price shall be adjusted

for any on Account Verification in Steel Prices. The following formula is used for

calculation of escalation.

Vm= IR x Q x Mo-M

Mo

Vm = Variation in material cost

IR = Rate of Steel item declared by SAIL and due date of submission of last price

bid.

Q = Quantity of Structural Steel date executed by CONTRACTOR.

MO= All India Variation Price Index for Iron & Steel commodity released by office

of Economic Advisor to Government of India, Ministry of Commerce and Industry

at the time of last price bid.

M = All India Variation Price Index for Iron & Steel commodity released by

office of Economic Advisor to Government of India, Ministry of Commerce and

Industry at the Time of placement of Purchase Order to Material Supplier.

In order to provide a cover against price rise for items that are not listed in the

contract for price escalation, appropriate contingencies are made at the time of

costing for this purpose.

Fluctuations in foreign exchange rates

In case of imported items for LSTK projects, company do not undertake outside hedging

in large scale.

67

So company in its every contract includes a clause to the effect that any “In case of

variation in the Cost Estimates which may occur due to fluctuations in the foreign

exchange rates, it would approach to its client with full details of sanction there of.

In those situations company is 100% protected against any fluctuations in foreign

Exchange rates.

However, EIL also undertakes In-House hedging which is calculated on the basis of the

weighted average of past four year trend of the foreign exchange market.

OVERALL RISK COVERING: Apart from the aforesaid risks the company protects

itself against the risks like accident, fire, theft, natural calamities etc. through an overall

risk covering insurance policy it includes Builders All Risk (bar)

--Builder risk insurance is a specialized policy designed to cover the property-loss

exposures associated with construction projects. This coverage protects the owner’s

investment from direct physical loss to the storage during the progress of construction.

Coverage may be written for the completed value of the project and can be extended for

facilities under expansion. Buildings under construction may be included, and then

endorsed to finished operations.

The insurance-requirements section of the construction contract should specify who is

responsible for purchasing the builder’s-risk insurance and exactly what coverage to

include in the policy. In some cases, the builder may be responsible for providing

coverage. In others, it may be the storage owner/developer’s responsibility.

--Contractors All Risk policy – It covers exposure causing Bodily Injury or Property

Damage with exceptions. It covers you acting in your capacity as a contractor only, for

example, kids playing on the job site fall in an uncovered trench. A CAR policy would

respond on your behalf. It would also respond to a claim such as one of your employees

accidentally damages the plumbing in a building & causes water damage.

68

--Professional Indemnity covers professional services such as design work, site

assessments & the like. Any contractor that does any sort of design work needs a

Professional Liability policy in case they make design errors.

69

A CASE:-

IN THE LSTK PROJECT, THE MAIN OBJECTIVE IS TO GET THE TECHNICAL &

COMMERCIAL ACCEPTABLE MATERIAL FOR THE PROJECT AT THE LOWEST

POSSIBLE PRICE SO THAT COMPANY CAN MAKE BETTER PROFITS.IF THE

VENDORS SEND THEIR BIDS WITH SOME DEVISTIONS LIKE DELAY IN

DELIVERY PERIOD, DEVIATIONS IN THE PAYMENT TERMS & NON

SUBMISSION OF PERFORMANCE BANK GUARNTEE, THEN THE COMPANY

WOULD CHARGE SOME LOADING AS A PENALTY AGAINST THOSE

DEVIATIONS IN ORDER TO EVALUATE ALL THE VENDORS ON SAME

GROUND.

SUPPOSE THERE IS A CASE, WHERE EIL HAS AN URGENT

NEED OF “HEAT EXCHANGER” WHICH IS GOING TO BE USED IN ITS

UPCOMMING PROJECT NAMELY PX1& PX2. FOR THIS, FIRSTLY THE

INFORMATION IS SEND TO VARIOUS VENDORS IN THE FORM OF RFQ

ALONG WITH THEIR TERMS AND CONDITIONS & THE LOADING THAT

WOULD BE CHARGED BY THEM IN CASE OF ANY DEVIATIONS FROM THE

TERMS OF EIL.

FEW VENDORS NAMELY INDOTECH OF CHENNAI, KUMAR ELECTRICALS

FROM MEERUT, RIMA TRANSFORMER FROM BANGALORE

ANDVOLTAMPFROM VADOFARA RESPONDED BY SENDING THEIR BID’S

(UNPRICED & PRICED SEPERATELY) TO THE COMPANY.THESE VENDORS

SEND THEIR BIDS BUT WITH SOME DEVIATIONS FROM THE TERMS OF EIL.

THE BELOW MENTIONED CASE EXIBITS THE BASIS PROCEDURE OF BID

ANALYSIS AND CALCULATION OF LI COSIDERING LOADING FACTOR.

70

MODEL RFQ SEND TO VARIOUS VENDORSREQUEST FOR QUATATION (RFQ)

Ref.SPC/6318/1006/055/6319/46/6318/017/0051/6318/071/…./…/...

Date: 04/04/2008

M/S. XYZ LTD.

907 PRAKASH DEEP

7,TOLSTOY MARG

CONNAUGHT

PLACE

NEW DELHI-110001

PH. NO. 011-------

India.

Fax No.-011-------

E-mail--------

Client : Indian oil corporation limited

Project : PX1 & PX2 PROJECT

Rfq no.

SPC/6318/1006/055/6319/46/6318/017/0051/6318/071/…./…/...

Item: heat exchanger

Due date : Immediately by fax & E-mail

Reference.

Our purchase order no. SPC/6318/1006/055/6319/46/6318/017/0051/6318/071…./…/...

Item: HEAT EXCHANGER

Gentlemen,

Bids are requested for spares as per the enclosed list, against the above referred purchase

order. The bids may be submitted through return e-mail or fax or by courier, for the

captioned item in complete accordance with RFQ document/attached.

Composite Bids should be submitted, in a single envelop. The offer shall only contain

duly filled up price schedule as per the enclosed format. Please do not furnish any

technical and commercial information/deviation other than the price schedule.

Prices shall be filled up strictly in the in closed price schedule format, without any

modifications.

Contact person for this RFQ are: Mr.X, Senior Manager (C&P): E-mail ---------

71

The bids will be opened immediately on the receipt of the same. There shall be no public

opening of bids.

As purchaser intends to contract directly with supplier of the goods for which bids are

invited, the bids should be prepared by the supplier and submitted directly. Purchaser

reserves the right to reject offers made by intermediaries.

The order, if placed, will be issued by EIL.

The bidder shall bear all costs associated with the preparation and submission of its bid,

and the purchaser shall in no case be responsible or liable for these costs regardless of the

conduct or outcome of the bidding process.

The enclosed “commercial terms and conditions (annexure 1)” shall be applicable.

We reserve the right to make any changes in the terms and conditions of purchase and to

reject any or all the bids.

Yours truly

Mr.X

Senior Manager (C &P)

Enclosures:-

PRICE SCHEDULE FORMAT (1 Page)

ANNEXURE- 1: COMMERCIAL TERMS AND CONDITIONS

72

PRICE SCHEDULE FORMAT (INDIAN BIDDERS)

RFQ No.: SPC/6318/1006/055/6319/46/6318/017/0051/6318/071/----/…/... ORDER No.: 6318/1006/055/6319/46/6318/017/0051/6318/071/…../…/... Project: PX1&PX2 PROJECTItem: heat exchangerS.No. ITEM

DESCRIPTIONTAG NO. QTY

(nos.)Unit Price (Rs.) On FOT dispatch point basis

Total amount (rs.) on FOT dispatch point basis

1. DE DWG NO. 2H94169

206-P3A/B 1

2. NDE DWG NO. 2H941670

206-P3A/B 1

Transit risk insurance shall be arranged by EIL.

The salient features of the offer are as below: 1. Dispatch point -------------------------------2. Excise duty +education cess _____________% Extra3. Excise duty : Tariff Sub heading No. __________________4. Central sales Tax against form ‘C’ _____________% Extra5. VAT against form ‘D1’

(applicable for supplies from Haryana State)_____________% Extra

6. Cenvatable Service tax on fright Charges, if any(not included in the freight charges)

_____________% Extra

7. Packing & Forwarding charges Included8. Freight Charges extra upto Project site ______________% Extra

OR1. CURRENCY OF QUOTE ________________________2. AIRPORT OF SHIPMENT ________________________3. PACKING &FORWARDING &FCA CHARGES INCLUDED4. AIR FREIGHT CHARGES extra up to DELHI

AIRPORT, INDIA______________% EXTRA

We confirm total compliance to the commercial terms and conditions enclosed with the RFQ._________________ _________________________(NAME OF BIDDER) (SIGNATURE OF BIDDER)

73

COMMERICAL TERMS AND CONDITIONS

DELIVERY PERIOD

Indian bidders to deliver in eight month on FOT dispatch point basis from the date

of FO and PO.

PAYMENT TERMS:-

FOR INDIAN BIDDERS

100% payment including taxes, duties and transportation charger shall be released after

receipt & acceptance of material at site against submission of dispatch documents.

FOR FORGEIGN BIDDERS

100% payment shall be made through wire transfer against submission of shipping

documents.

OFFER VALIDITY:-

Offer validity shall be one month from the final bid due date.

PERFORMANCE BANK GUARANTEE

Performance bank guarantee shall not be required to be furnished by bidders.

INSPECTION

Supplier’s in-house inspection and test certificate shall be valid for inspection

requirement.

74

TRANSPORTATION

FOR INDIAN BIDDERS:

All indigenous materials shall be transported through GATI/XPS Cargo/Courier on

freight pre-paid basis.

ALL FOREIGN SHIPMENTS:

All foreign shipments shall be air-freighted (Port of entry shall be Delhi).

TERMINATION

TERMINATION FOR DEFAULT

The purchase reserves the right to terminate the purchase order or nay part thereof by a

written notice to the supplier if:

The supplier fails to comply with the terms of purchase order including specifications and

other technical requirements.

The supplier becomes bankrupt or goes to liquidation.

The supplier fails to execute the purchase order on time/or replace the rejected goods

promptly.

Upon receipt of the said termination notice, the supplier shall discontinue all work on the

purchase order and matters connected with it.

The purchaser in that event will be entitled to get the contract executed from another

agency and recover the excess payment over the supplier’s Purchase Order amount, if

any, from the supplier.

75

TERMINATION FOR CONVENIENCE

EIL reserve the right to terminate the order, in whole or in part, at any time for its

connivance. However, the payment shall be released to the extent to which work has been

executed as determined by Purchaser till the date upon which such termination becomes

effective.

GOVERNMENT LAW AND JURIDICTION:

The order shall be governed by Indian Law. All disputes relating to this order between

the purchaser and the supplier shall be deemed to have risen in the State of Delhi and is

subject to Jurisdiction of New Delhi Courts, India.

ARITHMATICAL ERRORS WILL BE RECTIFIED ON THE FOLLOWING

BASIS:

If there is discrepancy between the unit price and the total price that is obtained by

multiplying the unit price and quantity, the unit price shall be prevailing and the total

price will be corrected.

If there is discrepancy between the total bid amount and the sum of total prices, the sum

total prices shall prevail and the total bid amount will be corrected.

WARRANTIES/ GUARANTEE

The supplier shall guarantee that any and all materials used in execution of the order shall

be in strict compliance with characteristics, requirements and specifications agreed upon

and that the same shall be free from any defects. The supplier will guarantee that all

materials shall be repaired or replaced as the case may be, at his own expense in case the

same have been found to be defective in respect of materials, workmanship or smooth

76

and rated operation within a period of 12 months after the same have been put up in

service or 18 months from the date of shipment, whichever is earlier.

Should any defect develop during guarantee period, it shall be rectified promptly free of

charge by the supplier and all expenses for transportation and return of goods

necessitated for such repair or replacement shall be borne by the supplier.

ARBITRATION

All disputes and questions whatsoever which shall arise between the purchaser and the

supplier out of or in connection with this agreement as to the construction or application

there off or to the respective right and obligations of the parties there – under or by

reason of the supply or failure or refusal to supply any material or as to any other mater in

any way relating to these presence, shall be referred to the arbitration, in accordance with

Indian arbitration and conciliation act, 1996. The venue of such arbitration shall be New

Delhi.

77

LOADING FACTOR

PRS: - DEVIATION TO PRICE REDUCTION SCHEDULE FOR DELAYED

DELIVERY (PRS):-

TOV- Total Order Value.

DOV- Delayed order value.

S.no Terms offered by the bidders Price loading

1. 1% of DOV up to max. of 10%of TOV NO loading

2. 1% of DOV up to max. of 10% of DOV 2.5%

3. Other Than the above 5%

PAYMENT TERMS

No Terms offered by the bidders Price loading

1. Firm prices No loading

2. In case of price variation

formula

With ceiling.

Loading by ceiling percentage offered.

3. No ceiling on the formula

specified.

1.5 times the max. ceiling specified by other

Bidders.

4. No formula & no ceiling

specified by the bidders.

Offer may be rejected.

Price loading on account of payment terms at variance with Bidding documents

payments will be loaded@13% per annum for the relevant period

78

BID ANALASIS AND RECOMMENDATIONS (unpriced)

Sn VENDOR INDO TECH KUMAR ELECTRICAL

RIMA TRASFORMERS

VOLTAMP

NO. TERMS & CONDITIONS

CHENNAI MEERUT BANGALORE VADODARA

1. PRICE BASIS FOR DESPATCH POINT

FOR DESPATCH POINT

FOR DESPATCH POINT

FOR DESPATCH POINT BASIS

2. FOR DESPATCH POINT

CHENNAI MEERUT BANGALORE VADODARA

3. PACKING &FORWARDING

INCLUDED INCLUDED INCLUDED INCLUDED

4. FREIGHT UPTO PROJECT SITE

0.75% EXTRA 2.73% EXTRA RS 15000/-PER TRANSFORMER

2% EXTRA

4.1 CENVATABLE SERVICE TAX ON FREIGHT

NOT APPLICABLE

NOT APPLICABLE

12.36% EXTRA NOT APPLICABLE

5. TRANSIT INSURANCES(BY EIL)

BY EIL BY EIL BY EIL BY EIL

6.1 EXCISE DUTY + EDUCATION CESS

(14%+3%CESS)EXTRA

(14%+3%CESS)EXTRA

(14%+3% CESS) EXTRA

(14%+3%CESS) EXTRA

6.2 CENVATABLE/NON CANVATABLE

CED ED-100%/NON CEN ED-NIL

CED ED-100%/NON CEN ED-NIL

CED ED-100%/NON CEN ED-NIL

CED ED-100%/NON CEN ED-NIL

6.3 EXCISE DUTY ON FREIGHT

NOT APPLICABLE

NOT APPLICABLE

NOT APPLICABLE

NOT APPLICABLE

7.1 CST WITH FORM “C”

NOT APPLICABLE

2% EXTRA 2% EXTRA 2% EXTRA

7.2 VAT WITHOUT FORM “D”

4% EXTRA NOT APPLICABLE

NOT APPLICABLE

NOT APPLICABLE

7.3 CST/VAT ON FRIEGHT

NOT APPLICABLE

NOT APPLICABLE

NOT APPLICABLE

NOT APPLICABLE

8 DELIVERY PERIOD-08 MONTHS ON FOT DESPATCH POINT BASIS FROM THE DATE OF FOA/P.O.

ACCEPTABLE ACCEPTABLE ACCEPTABLE ACCEPTABLE

9 PRICE REDUCTION FOR DELAY IN DELIVERY(1% DOV-10%TOV)

DEVIATION DEVIATION DEVIATION ACCEPTABL E

10 PAYMENT TERMS:-5% ON APPROVEL 10% ON 20% ON ACCEPTABL E ACCEPTABL E

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OF DRGS APPROVEL OF DRGS

APPROVEL OF DRGS

80% AGAINST DESPATCH DOCUMENT THROUGH EIL

90% AGAINST DESPATCH DOCUMENT THROUGH EIL

80% AGAINST DESPATCH DOCUMENT THROUGH EIL

ACCEPTABL E ACCEPTABL E

5% ON RECEIPT OF FINAL DRGS10% ON RECEPIT AND ACCEPTANCE OF GOODS/EQUIPMENT AT SITE & ON SUBMISSION OF 10% PBG

11 PRICE-FIRM/VARIABLE

FIRM FIRM FIRM FIRM

12 PERFORMANCE BG-10%

ACCEPTABL E ACCEPTABL E ACCEPTABL E ACCEPTABL E

13 GUARANTEE PERIOD-12/30M+3MONTHS

ACCEPTABL E ACCEPTABL E ACCEPTABL E ACCEPTABL E

14 PART ORDER ACCEPTABL E ACCEPTABL E ACCEPTABL E ACCEPTABL E15 REPEAT ORDER16 GERNERAL

PURCHASE CONDITIONS

ACCEPTABL E ACCEPTABL E ACCEPTABL E ACCEPTABL E

17 SPECIAL INSTRUCTION TO BIDDERS

ACCEPTABLE ACCEPTABLE ACCEPTABLE ACCEPTABLE

18 OFFER VALIDITY-3M FROM BID DUE DATE OF 22-04-2008

21-07-2008 21-07-2008 21-07-2008 21-07-2008

19 TESTING CHARGES AS PER MR/TPI CHARGES

INCLUSIVE/ NOT REQUIRED

INCLUSIVE/ NOT REQUIRED

INCLUSIVE/ NOT REQUIRED

INCLUSIVE/ NOT REQUIRED

20 ITEMS QUATED/NC ALL /NIL ALL /NIL ALL /NIL ALL /NIL21 SUPERVISION

CHARGESNOT REQUIRED AS PER TBA NOTE A3

NOT REQUIRED AS PER TBA NOTE A3

NOT REQUIRED AS PER TBA NOTE A3

NOT REQUIRED AS PER TBA NOTE A3

22 TECHNICAL ACCEPTANCE

ACCEPTABLE REFER TBA

ACCEPTABLE REFER TBA

ACCEPTABLE REFER TBA

ACCEPTABLE REFER TBA

23 COMMERCIAL ACCEPTABILITY

ACCEPTABLE ACCEPTABLE ACCEPTABLE ACCEPTABLE

24 MANDATE FORM SUBMITTED SUBMITTED SUBMITTED SUBMITTED

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BID ANALYSIS AND RECOMMENDATIONCALULATION OF LOADING FACTORS:

VENDORSINDOTECH KUMAR

KUMAR ELECTRICAL RIMA VOLTAMP

         BASIC PRICE 1 1 1 1         TESTING CHARGES 0.000O 0 0 0  (INCL) (INCL) (INCL) (INCL)

THIRD PARTY INSPECTION CHARGES not required not requirednot required not required

         PACKING & FORWARDING 0 0 0 0  (INCL) (INCL)    FOT DESPATCH POINT PRICE 1 1 1 1         FREIGHT 0.0075 0.0273 0.01037 0.02

  75% 2.73%15000/ 1447000 2%

CENVATABLE SERVICE TAX ON FREIGHT 0 0 0           EXCISE DUTY + CESS 0.1442 0.1442 0.1442 0.1442  14.42% 14.42% 14.42% 14.42%EXCISE DUTY ON FREIGHT                 CST/VAT 1+ex 0.045768 0.022884 0.02288 0.022884  4% 2%CST 2%CST 2%CSTCST/VAT ON FREIGHT 0 0 0 0

         FOT SITE PRICE 1.197468 1.194384 1.17745 1.187084         loading of deviation to payment terms 0.0038918 0.0065 0 0loading of deviation to PRS 0.0598734 0 0 0loading of performance bank guarantee 0   0 REJECT         TOTAL 1.2612332 1.200884 1.17745 REJECT         LESS:CENVATABLE EXCISE DUTY 0.1442 0.1442 0.1442  LESS:CENVATABLE VAT 0.045768 0 0  LESS:CENVTABLE SERVICE TAX 0 0 0  

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NET LOADING FACTOR = TOTAL-CENVATABLE E.D-CANVATABLE VAT-CENVATABLE SERVICE TAX 1.0712652 1.056684 1.03325           ENGINEERS INDIA LTD. RFQ NO.      

NEW DELHI ITEM: HEAT EXCHANGER    

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BID ANALYSIS AND RECOMMENDATIONS(PRICED)

    PRICE COMAPARISION

   

S.no.

APPROX ERRECTION WEIGHT (KG)/UNIT

SHELL THICHNESS (mm)

ITEM NO QTY. (UNIT) UNIT

PRICE (RS)

UNIT FREIGHT (RS) LOADING

TOTAL AMOUNT

(RS)

         INDOTECH-CHENNAI

                 1 5000 6.35 31-E-106 1 8,796,000 100000 1.071265 9529974.961

                 2 600 4 31-E-107 1 1,000,000 100000 1.071265 1178391.688

                 3 1000 4 31-E-111 1 1,169,000 100000 1.071265 1359435.502

                           KUMAR ELECTRICALS-MEERUT                 

1 5000 6.35 31-E-106 1 4000000 200000 1.056684 4438072.8                L 1

2 600 4 31-E-107 1 800000 40000 1.056684 887614.56                 

3 1000 4 31-E-111 1 900000 40000 1.056684 993282.96                          RIMA TRANSFORMERS-BANGLORE                 

1 5000 6.35 31-E-106 1 5800000 415000 1.03325 6421650.459                 

2 600 4 31-E-107 1 500000 40000 1.03325 557955.1485                L 1

3 1000 4 31-E-111 1 825000 40000 1.03325 893761.4879                L 1                 

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Recommendations for LSTK Projects

The company should try avoiding the use of “price escalation clause” for each and

every item as it may give the wrong impression in the mind of the client and they

may switch over to some other company for their other projects.

The company should enter into more of the hedging contracts as it gives them the

opportunity to earn some profit rather than making the clause of payment for

variations by the client.

At the time of cost estimation company should try to do more research work to

ascertain the future price of the material & equipments rather than keeping the

clause “payment on the basis of actual” as in case of any fall in the price company

get liable to reimburse the client for the difference amount and thereby completely

finishes the opportunity to earn any profit under that contract.

As we have seen that company in its business preferences has shifted its focus

from just doing EPC contracts to LSTK contracts. But later being not able to

generate as much profit as much is expecting from it. Therefore, company need to

access cost effective funds for project management from domestic or international

agencies and multilateral funding agencies.

At the time when more international players are coming into the market, EIL does

not do much of the competitors study or analyses on large scale, which may result

in lose of future clients. So company must focus on some promotional activities

especially for their services in LSTK projects.

EIL would need to take urgent action to consolidate its own internal strengths and

forge itself to enter into some strategic partnership to upgrade itself in technology,

to sustain its presence in this fast changing business environment.

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EIL has a large pool of qualified technical manpower. This pool is likely to be the

target of new players, particularly the international consultancy companies and

EIL should address HRD with positive measures, building up employee loyalty

and commitment.

.

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86

Bibliography

Reference from: EIL Guidelines

DPE Guidelines

www.eil.co.in

www.l&tltd.com

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